In a repeated principal-agent model in which the agent's actions are observable to the principal but not verifiable in court, the agent's incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior. Explicit short-term contracts are designed to enhance the effectiveness of the infinite-horizon implicit contract between principal and agent. In a constrained-efficient equilibrium, bonuses smooth the consumption path of the risk-averse agent by moving in the opposite direction from salaries, total consumption, and expected discounted utility for the rest of the game.Journal of Economic LiteratureClassification Numbers: C7, C73, D8.
ASJC Scopus subject areas
- Economics and Econometrics